After Repair Value in Real Estate: How to Calculate ARV - 2021

After repair value (usually shortened to ARV) refers to a property’s estimated market value after it undergoes specific repairs and renovations. ARV is an essential factor for real estate investors who flip houses because it helps them determine the valuation of particular properties so they can maximize profitability and [return on investment](https://www.masterclass.com/articles/how-to-calculate-return-on-investment-roi) (ROI). Understanding the ARV will help investors identify how much money they should invest in renovations and if the property is worth their investment. For example, if a house has a low [fair market value](https://www.masterclass.com/articles/fair-market-value-explained) and comparable housing in the area sells at a lower price point, investors can use the ARV to determine the profitability of their investment. After repair value, or ARV, is commonly used in [house flipping](https://www.masterclass.com/articles/house-flipping-guide), a short-term real estate investment strategy in which a person buys a property (often a “fixer-upper” or distressed property), makes repairs and renovations, then sells it for a profit. To ensure they’re going to have a large enough [profit margin](https://www.masterclass.com/articles/gross-profit-margin-explained), a real estate investor will look for a property with a lower purchase price than its estimated ARV and renovation costs. ARV can also be an important figure for lenders (usually private or hard money lenders) offering ARV loans for renovations to buyers of distressed properties. In general, lenders determine the maximum amount for an ARV loan based on the after repair value of a property (rather than the asking price of the property or the property’s current value). Then, a lender-approved appraiser assesses the ARV to determine the final loan amount. House flippers and other property resellers often operate within the “70 percent rule,” a rule of thumb that recommends only buying a property priced at no more than 70 percent of the after-repair value (ARV), minus the cost of renovations. Here’s the formula for the 70 percent rule: (ARV x 0.7) – estimated repair cost = maximum bid price Here’s an example of how the rule works in the field: A real estate investor finds a property that they’re interested in as a flip project. They estimate the house has an ARV of $500,000 after their designated repairs, and they’re expecting the cost of repairs to be around $50,000. Ideally, they’ll be left with $500,000 minus $50,000, or $450,000, once the house sells. Using this formula, investors will know not to purchase the subject property for more than 70 percent of $450,000 ($450,000 times 0.7), or $315,000. If you want to purchase a home and need to know the property’s value after repairs and renovations, you can either hire an appraiser to do a comparative market analysis (CMA) or do your own rough calculation. If you prefer to do it yourself, you don’t need an ARV calculator. Here’s a step-by-step guide to help you determine a home’s ARV: 1. __Find comparable properties in the area__. The most reliable way to identify a property’s ARV is to search for real estate comps, or comparable sales. Look through [multiple listing services](https://www.masterclass.com/articles/what-is-mls-in-real-estate) or talk to local [realtors](https://www.masterclass.com/articles/what-is-a-realtor-explained) or real estate agents to find properties that have recently sold within one mile of your investment property. Prioritize properties with features similar to your property’s projected repaired and renovated state (rather than its current condition). Finding homes with similar square footage is not necessary. Additionally, the comps you select don’t need to have the same number of bedrooms or bathrooms as your property. 2. __Calculate the price per square foot of the comps__. After you find a few similar properties, divide their selling price by their [square footage](https://www.masterclass.com/articles/how-to-measure-square-footage-of-a-house). For example, if a 3,000 sq.ft. comp sold for $300,000, its price per square foot would be $100 per sq. ft. Make this calculation for each comp, and then average the results (or add them all up and divide by the number of comps) to determine the average price per square foot of comparable homes in the area. 3. __Use price per square foot to determine ARV__. Next, use the following ARV formula to determine the property’s after repair value: avg. price per sq. ft. of comps x your property’s sq. ft. = ARV. For example, if the average price per square foot is $100/sq. ft., and your property is 1,500 square feet, the ARV of the property would be $150,000. This calculation is just an estimate—home sales are subject to significant shifts in the real estate market conditions, local trends, appraised value, and other factors. All you need is a [MasterClass Annual Membership](https://www.masterclass.com) and our exclusive video lessons from prolific entrepreneur Robert Reffkin, the founder and CEO of the real estate technology company Compass. With Robert’s help, you’ll learn all about the intricacies of buying a home, from securing a mortgage to hiring an agent to tips for putting your own place on the market. In real estate investing, ARV stands for after-repair value, an estimated value essential to determine which properties are suitable investments.